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Dollar Rally Curbed Again by 1.2825 Support for EURUSD

By , Chief Currency Strategist
27 September 2012 04:36 GMT

  • Dollar Rally Curbed Again by 1.2825 Support for EURUSD
  • Euro Stands at Support Against Dollar, Yen and Pound with Event Risk Ahead
  • Australian Dollar Will Break 1.03 If Risk Aversion, Rate Outlook Combine
  • British Pound Lures Traders but GBPUSD and GBPJPY Support Still Holds
  • Japanese Yen Not Easing on Intervention Warnings, China Row
  • US Oil Near Two-Month Lows as Speculative and Growth Outlook Weigh
  • Gold Gives a False Break Below 1750 – What Would a Bear Trend Require?

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Dollar Rally Curbed Again by 1.2825 Support for EURUSD

US equity markets – a favored benchmark for investor sentiment – extended a critical break lower through this past session, and volatility measures advanced to three week highs. Furthermore, investors’ go-to capital harbor 10-year Treasury note extended its rally to an eighth day (the longest run since December 2008) while the fundamental headlines ran increasingly dire assessments of the Euro-area crisis, China-Japan tensions and global growth forecast. In essence, we are presented with a fundamentally-comprehensive wave of ‘risk aversion’. That being the case, we would expect the safe haven dollar to rally.

The greenback did indeed advance Wednesday to two week highs and fully reversed its QE3 losses suffered immediately before and after the MBS program was announced back on September 13. However, there is unmistakable hesitance from the dollar. Though the Dow Jones FXCM Dollar Index (ticker = USDollar) posted a higher intraday high and daily close, we find all of its gains fully retraced through the early Asia trading session. Furthermore, we find both restraint in trend development and reticence at important technical levels amongst the crosses - like 1.2825 for EURUSD and 1.6150 for GBPUSD. The speculative ranks are not committing to unwinding their risky positions and abandoning all hope of return for sanctuary. That may be because the markets are responding to short-term factors rather than the more critical ‘themes’.

There are two prominent bearish drivers that the headlines are gravitating towards: reversal of QE3 premium and end-of-quarter flows. A seasonality effect for the capital markets, the end of the third quarter (Friday) is considered a time for fund rebalancing and booking positions for accounting purposes. This is generally considered a selling event in the lead up and buying effort after the transition. Yet, history of the past five quarterly transition periods doesn’t really substantiate that assumption. As for the ‘buy the rumor, sell the news’ on the Fed’s most recent stimulus injection; this is the only EURUSD bull swing we’ve seen in the first two weeks following a major program (versus QE1, QE2 and Operation Twist). That gives the dollar rebound a little more weight, but we need more to turn correction to outright trend.

What the dollar needs to break its near, four-month bear trend is a convincing tumble in investor sentiment. That may not seem difficult given the abundance of problematic fundamental issues moving forward. That said, the extreme lack of yield and benchmarking of prominent events ahead (Q3 earnings, Q3 GDP, US elections, etc) will dampen conviction. What we have moving forward are the ideal conditions for volatility, not trend. That said, potentially extreme swings in markets is a strong argument for a liquidity asset like the dollar…

Euro Stands at Support Against Dollar, Yen and Pound with Event Risk Ahead

Is it the disturbing headlines from the Euro-area’s troubled areas that push the euro to its selloff or the currency’s losses that make the newswires read so bombastic? There is little doubt that the protests in Greece and Spain (turning to violence in some areas) are an inauspicious assessment of the region’s most at-risk members. Not only do the demonstrations reflect growing dissension against measures aimed at stabilizing the entire Eurozone’s financial stability, but they also have a material impact on economic activity. Meanwhile, details on whether Greece receives its next tranche of second round bailout aid (much less win more time or better rates) are in short supply and Spanish Prime Minister Rajoy refuses to ask for a full bailout regional tensions build. This is an explosive situation with EURUSD, EURJPY and EURGBP standing at support (1.2825, 100 and 0.7925 respectively). As we monitor these bigger themes, don’t miss that we have a round of Spanish, Portuguese and Irish economic data due for release over the next 48 hours.

Australian Dollar Will Break 1.03 If Risk Aversion, Rate Outlook Combine

The slide in global shares the past 48 hours has had a clear impact on carry appetite. The Australian dollar has suffered considerable loss against opposing funding currencies. Yet there is another weigh on the Aussies shoulders. With a slide in confidence, we find the 12-month RBA rate forecast at a two-year low (-104 bps) and chance of a October 2 cut (72 percent) at dovish levels not seen since June 15.

British Pound Lures Traders but GBPUSD and GBPJPY Support Still Holds

I am particularly interested in GBPUSD as it has worked its way into the tightest bout of congestion (measured on the lowest average change on a 20-day rolling basis) in years after the longest string of weekly gains since late 2004. The brief dip beneath 1.6150 for the cable was tempting, but the same fundamental concerns that exist for the dollar and euro fall to this pair: persistence in risk trends to sustain a move. So, I wait.

Japanese Yen Not Easing on Intervention Warnings, China Row

Policy officials have made a considerable effort to reinforce the threat that they could move at any time to intervene on the market even if the government is in the process of rotating the Finance Minister position. BoJ member Sato stated that the bank was ready to act as Japan’s future looked at risk from the Euro crisis, China slowdown and global winds. That has as little impact as the China-Japan spat has shown for the yen.

US Oil Near Two-Month Lows as Speculative and Growth Outlook Weigh

US crude dropped for a third day through Wednesday. The 1.5 percent tumble was the sharpest in just a week – but that is statement to how aggressive the commodity’s decline has been over two weeks. Down over 10 percent from its peak just a few weeks ago, its telling that the sharp correction in DoE inventory figures this past session (down 2.45 million barrels) should have little sway in holding the selloff back.

Gold Gives a False Break Below 1750 – What Would a Bear Trend Require?

Eager gold traders may have been tricked into a false move this past session. A quick tumble below 1750 looked like a break of nearly two weeks of congestion and the reversal of the most exceptional bull trend seen since the beginning of the year. Yet, a quick bounce closed the market back above that critical level. What does it take for a bear wave to stick? A sustained dollar rally could do it.

**For a full list of upcoming event risk and past releases, go towww.dailyfx.com/calendar

ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

1:30

CNY

Industrial Profits YTD (YoY) (AUG)

-

-2.7%

Expected to be lower as China slows into the end of 2012

6:00

EUR

German Import Price Index (MoM) (AUG)

0.8%

0.7%

Import prices expected higher on commodity prices

6:00

EUR

German Import Price Index (YoY) (AUG)

2.7%

1.2%

7:55

EUR

German Unemployment Change (SEP)

10K

9K

German labor market expected to see recovery, though debt crisis still seen to cap additional confidence

7:55

EUR

German Unemployment Rate s.a. (SEP)

6.8%

6.8%

8:00

EUR

Euro-Zone M3 s.a. (3M) (AUG)

3.4%

3.4%

Eurozone money supply continues to outpace inflation on ECB easing

8:00

EUR

Euro-Zone M3 s.a. (YoY) (AUG)

3.3%

3.8%

8:30

GBP

GDP (QoQ) (2Q F)

-0.5%

-0.5%

UK economy expected to continue recession, though higher investment points to private confidence while government cuts back spending

8:30

GBP

GDP (YoY) (2Q F)

-0.5%

-0.5%

8:30

GBP

Current Account (Pounds) (2Q F)

-12.2B

-11.2B

9:00

EUR

Euro-Zone Consumer Confidence (SEP)

-25.9

-25.9

Eurozone confidence levels still low as Spanish debt woes continue to hurt

9:00

EUR

Euro-Zone Business Climate Indicator (SEP)

-1.2

-1.21

9:00

EUR

Euro-Zone Economic Confidence (SEP)

86.1

86.1

12:30

USD

GDP (Annualized) (2Q T)

1.7%

1.7%

Output revision not expected to change

12:30

USD

Durable Goods Orders (AUG)

-4.7%

4.1%

Durable orders expected to drop; may sap risk appetite as Fed already introduced QE3

12:30

USD

Durables Ex Transportation (AUG)

0.3%

-0.6%

12:30

USD

Cap Goods Orders Nondef Ex Air (AUG)

0.5%

-3.4%

12:30

USD

Cap Goods Ship Nondef Ex Air (AUG)

-

0.0%

12:30

USD

Initial Jobless Claims (SEP 22)

375K

382K

Weekly data expected to be weaker, leading up to NFPs

12:30

USD

Continuing Claims (SEP 15)

3278K

3272K

14:00

USD

Pending Home Sales (YoY) (AUG)

-

15.0%

August sales may weaken before effects of QE3 seen in future

14:00

USD

Pending Home Sales (MoM) (AUG)

0.0%

2.4%

15:00

USD

Kansas City Fed Manf. Activity (SEP)

5

8

Midwest economy stable

22:45

NZD

Building Permits (MoM) (AUG)

3.0%

2.0%

Permits continue to rise

23:01

GBP

GfK Consumer Confidence Survey (SEP)

-28

-29

Confidence still low on recession

23:15

JPY

Nomura/JMMA Manufacturing PMI (SEP)

-

47.7

Economy still weak as exports continue to decline

23:30

JPY

Jobless Rate (AUG)

4.3%

4.3%

Japanese labor market seen stable, domestic services replacing weakness in manufacturing

23:30

JPY

Job-To-Applicant Ratio (AUG)

0.83

0.83

23:30

JPY

Household Spending (YoY) (AUG)

1.1%

1.7%

Spending pressured by low confidence

23:30

JPY

National CPI (YoY) (AUG)

-0.5%

-0.4%

Japan continues to be in deflation after lack of new BoJ policies, new tax proposals by government

23:50

JPY

Retail Trade (YoY) (AUG)

-0.3%

-0.7%

Strong yen seen cutting again into retail trade

23:50

JPY

Large Retailers' Sales (AUG)

-1.7%

-4.4%

23:50

JPY

Industrial Production (MoM) (AUG P)

-0.5%

-1.0%

Preliminary data expected to show drop again as strong yen combined with low confidence hit sector

23:50

JPY

Industrial Production (YoY) (AUG P)

-3.4%

-0.8%

GMT

Currency

Upcoming Events & Speeches

-

-

-

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visitTechnical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit ourPivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USDMXN

USDTRY

USDZAR

USDHKD

USDSGD

Currency

USDSEK

USDDKK

USDNOK

Resist 2

15.5900

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

15.0000

1.9000

8.5800

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

12.8480

1.7912

8.2057

7.7537

1.2295

Spot

6.5912

5.7909

5.7504

Support 1

12.5000

1.6500

6.5575

7.7490

1.2000

Support 1

6.0800

5.1050

5.3040

Support 2

11.5200

1.5725

6.4295

7.7450

1.1800

Support 2

5.8085

4.9115

4.9410

INTRA-DAY PROBABILITY BANDS 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist. 3

1.2998

1.6295

78.24

0.9481

0.9908

1.0489

0.8340

101.14

126.90

Resist. 2

1.2967

1.6267

78.10

0.9459

0.9891

1.0463

0.8319

100.85

126.60

Resist. 1

1.2936

1.6240

77.95

0.9437

0.9873

1.0438

0.8298

100.57

126.30

Spot

1.2875

1.6185

77.67

0.9393

0.9838

1.0386

0.8256

100.00

125.70

Support 1

1.2814

1.6130

77.39

0.9349

0.9803

1.0334

0.8214

99.43

125.10

Support 2

1.2783

1.6103

77.24

0.9327

0.9785

1.0309

0.8193

99.15

124.81

Support 3

1.2752

1.6075

77.10

0.9305

0.9768

1.0283

0.8172

98.86

124.51

v

--- Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

To be added to John’s email distribution list, send an email with the subject line “Distribution List” to jkicklighter@dailyfx.com.

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27 September 2012 04:36 GMT